Can Canada Post survive?

For most of us, the mail no longer holds the promise of letters from faraway loved ones or even of a mundane phone bill. The inbox has replaced mailbox as letter mail in Canada has dropped 20 per cent per address over the past five years.

This is not without consequence. In May, Canada Post reported its first loss in 16 years.

Worldwide, mail services have been adjusting to the impending irrelevance of letter mail. In Europe, many postal services have been privatized. The U.S. Postal Service has hired the same restructuring firm that has worked with some of the country’s car manufacturers.

“It’s a different world. We’re seeing the greatest transformation of postal service since Victorian times,” said Steven Fletcher, the minister in charge of Canada Post. “I’m optimistic but this is going to be a hard slog for Canada Post and there’s no two ways about it.”

Last year, Canada Post’s revenue was $7.48 billion, up 0.8 per cent from a year earlier. But it still had a $327 million loss. There are four reasons for this, said spokesman Jon Hamilton. There were anomalies in 2011: the 25-day labour disruption in June and a Supreme Court decision on pay equity on a case from 1983. Canada Post’s pension obligation was another reason. But it’s the decline in letter mail, the foundation of Canada Post’s business, which has the corporation evaluating its future.

“What we’re really seeing is the shift away from white envelopes, which is what our business is built upon. It’s a trend that’s not going to reverse itself and in fact is starting to accelerate,” Hamilton said. “We need to look at our business model and realize it’s not working, it’s not built for the future that we see therefore we have to make some changes.”

These changes mean Canada Post has expanded its reach into digital services. They’ve had epost, an online bill payment portal, for 10 years. It has 7.5 million registered users.

Now Canada Post is increasing its online offerings with services such as address verification for credit card companies, online magazine subscriptions and digital loyalty programs, among other things.

CEO Deepak Chopra, who took over in February 2011, divided the company in two, with one half focused on the physical delivery network and the other on digital.

Deepak Chopra

The corporation hired Kerry Munro, former managing director of Yahoo! Canada, in August 2011 to craft its digital strategy.

“There’s a shifting of our business that’s not just governed by how digital has transformed but how the ecosystem of how people shop, how they discover, how they want to receive services, etc.,” Munro said. “It’s a fair statement to say digital is here and here for good. I’m a firm believer though that digital is one path. It’s not going to be the only path. Certainly for generations to come there’s still going to be this duality (with letter mail) … but digital is going to be a key part of our future.”

Canada Post already does business with some city and provincial governments, including Toronto and Ottawa, but would like do more, getting into health cards, licence plate renewals and passports, Munro said.

“We think that there’s a natural opportunity built off of our epost service to safely and securely connect Canadians with business and government and in doing so create a new revenue stream for Canada Post but also make it easier for Canadians to conduct business online and manage the business of their lives and for government to do it, not just safely and securely, but in times of austerity to focus their investment dollars on policy and on the important things that governments do.”

Munro wouldn’t say how much Canada Post hopes to earn from the increased emphasis on digital.

As part of its revenue-generating efforts, Canada Post is increasing the price of stamps on its domestic base letter by two cents in January. The increase is part of its five-year stamp-pricing plan. Other categories of mail are going up in price too.

Despite these efforts to increase profits, Canada Post maintains it will never live up to its earning potential when labour costs take up 70 per cent of the budget. Last year’s employee walkout, which was followed by the decision to lockout the striking workers, indicates that neither the Canadian Union of Postal Workers (CUPW) nor management is interested in giving in too easily to the other’s demands.

Despite efforts to increase profits, Canada Post maintains it will never live up to its earning potential when labour costs take up 70 per cent of the budget.

Touting the 2011 loss is just an attempt to force the union to compromise even more, said CUPW National President Denis Lemelin. CUPW wants to provide workers with a wage that enables them to own a home, pay their bills and retire comfortably, Lemelin said.

“They want it overnight that the workers accept all this new technology, less wages, less benefits and no pension plan. Nobody can accept that. It’s a fact that the most important asset of Canada Post is the workers … it’s a corporation really built on the people and on the workers,” Lemelin said.

Canada Post is not asking existing workers to accept lower wages or fewer benefits, Hamilton said. The corporation wants only new hires to get less pay and benefits. Canada Post will lose 30,000 people over the next decade to retirement. The corporation estimates 3,000 of those jobs will go unfilled in its streamlined workforce.

“If you look at what we proposed in the last round of negotiations, it was all about the employees we hire in the future. Let’s prepare a compensation package that put us up well against the competition so we can hire great people and offer them a great package,” Hamilton said. “Affording the package that we provide to our people today and continuing to do that is infeasible … that’s the discussion we’ve had (with the union) to date with little success.”

The labour negotiation is still before an arbitrator. CUPW has challenged the constitutionality of the back-to-work legislation that ended the labour disruption. A decision is pending in federal court.

Both sides do agree something needs to change in order to keep Canada Post self-sustaining. The Crown corporation does not take tax dollars.

“Canada Post has to be more aggressive. It’s easy to say the mail is going down so we have to eliminate jobs and we want to replace people with machines. But it’s more proactive, more positive to turn around and say, ‘Yes, the traditional mail is going down so where can we expand?’” Lemelin said. “It seems like for them it’s inevitable. Maybe the mail’s going down but how can we change the trend and say at some point that we’ve turned that around?”

“They want it overnight that the workers accept all this new technology, less wages, less benefits and no pension plan. Nobody can accept that.”

The union is suggesting Canada Post get into the banking business.

But Hamilton dismissed the idea.

“We need to focus on our core business and what we’re experts at and what we’re good at and that is growing our parcel business, growing an online platform for people to get their bills and statements and doing a number of other things to really grow our core business where we are experts,” he said.

Canada Post is going after other revenue opportunities, Hamilton said. In addition to its digital plans, the corporation has also beefed up its shipping businesses, investing more than $300 million in the last two years to stem the losses from the letter mail decline.

Canada’s is not the only postal service struggling with the drop in letter mail. In the U.S., where there have been multi-billion-dollar losses since 2006, the postal service there has come up with its own five-year plan.

“The recent recession just made things worse. Businesses cut back on their mailings. It was the combination of the two that really hit us hard,” said United States Postal Service (USPS) spokesman David Partenheimer.

The plan will reduce annual costs by $22 billion by 2016. The USPS’s operating budget is $65 billion per year. It was vetted by Evercore Partners, an advisory firm that worked with some carmakers during restructuring.

“They’ve done an independent review of our plan and validated it as a plan that would succeed in returning us to profitability.”

As in Canada, the USPS’s labour costs make up a significant portion of the budget at 80 per cent. Laws requiring pre-funding of the employee pension fund at $5 billion every year, are making things worse, Partenheimer said.

“That’s just not sustainable.”

The USPS has cut 300,000 employees, about one-third of its workforce, in a decade.

Some of the problems come from tight government control over the USPS, Partenheimer said, which prevents the service from making cost-cutting changes. For example, a law would have to change to stop mail delivery on Saturdays, which would save $2.7 billion a year.

But it’s not just about cutting workers and services. Partenheimer said the USPS plan is to expand in an effort to increase profits.

“We’re been taking costs out of out of our system for years. There comes a point where you just can’t cost-cut your way out. You have to take other actions. That’s a major component of the plan. We’re taking costs out of the system. We’re looking to be more efficient but also looking at new revenue generation opportunities,” Partenheimer said. But, he added, “There will always be a need for hard copy mail, no matter how technology changes.”

The Internet has already increased profit for the USPS in one regard: online shopping. There has been profitability in the shipping business due to shipping the products ordered, Partenheimer said.

But USPS doesn’t plan to hastily log on to all things Internet. It’s taking a cautious approach to digital, seeing what works before committing to it.

“I don’t have anything to announce at this time. All I can tell you is we’re taking a serious look at digital aspects related to mail. But also being really careful looking at other countries where they have not had success in that area so we’re taking a methodical approach, a careful approach to determine what would work in this country.”

One thing in the works is a plan for the USPS to use its vast network and information to offer tailored marketing opportunities to companies, Partenheimer said. For example, a pizza shop “where they want to reach customers within a very defined area … this would allow them to send menus or specials in the mail right in their customer service area and reduce costs. This will be a very effective form of advertising for them,” he said.

This could work for Canada Post too, said Opher Baron, a professor of operations management at the Rotman School of Management. Baron said Canada Post could use its intimate knowledge of the particular mail and parcels Canadians receive to offer a service to businesses interested in tailoring their marketing as well.

“They have great information and when they deliver a package to my house, they know that I’m a customer of this business. In any statistical model you would run, the one that would be the most important one would be: did I purchase something similar in the past?”

Canadians would need to get over their fear this would mean an invasion of privacy, Baron said, as this happens on the Internet all the time.

“It’s a question we must ask ourselves in the e-world as well. Everybody can find what I’m doing from my computer in the e-world and it’s become legitimate that this is part of the game. If you want to be on the Internet, people will know I went on a particular site and will be able to tailor their marketing to me. Doing the same in the brick and mortar world, I don’t like either one but I think this is the world we’re living in,” Baron said.

Hamilton said Canada Post is developing a permissions-based approach that will ensure privacy is maintained while allowing customers access to relevant offers and promotions.

“In terms of rollout, we have not yet built a permissions-based platform so this would be a potential future initiative that will be governed by the ongoing growth of digital as well as the deeper levels of privacy protection that are evolving in Canada and for which we have always maintained at the highest level,” Hamilton said.

It’s not only North American postal services that have been hurt by the decline in letter mail. Postal services around the world have been changing to adapt. In Europe, for example, many postal services have been privatized in an effort to return to profitability, said Harvey Schwartz, retired professor of economics at York University.

The trend toward privatizing the mail service started about a decade ago.

Inside a Canada Post plant.

“They were losing a lot of money and they figured if they took on new functions outside the realm of just the post office, they would do better, and they have. I can’t see any reason why Canada Post can’t be privatized too.”

The corporation’s pension obligation is one reason privatization isn’t an option right now, Fletcher said.

“We have to see if the transformation goes well. There’s still this huge pension liability, which is almost like a poison pill for that path. But we need to think about what we can do and that’s what we’re doing,” he said.

In the midst of the financial turmoil, Canada Post has invested $2 billion to upgrade its aging equipment as part of its postal transformation program, rolled out five years ago. Some of the corporation’s equipment has been in use since the 1970s, Hamilton said.

This transformation will also change the way Canada Post delivers mail and parcels with one driver covering all deliveries in several neighbourhoods, he said.

“That’s really about modernizing all our equipment and gearing up for e-commerce and being much more efficient and enabling the new delivery model where you see the mail being sorted by machines rather than by hand.”

Some cost-cutting measures aren’t been discussed, Hamilton said. There are no plans to stop door-to-door delivery in favour of SuperMailboxes, Hamilton said, adding there are no plans for delivery surcharges either.

“What we have been doing is changing the way we deliver mail quite dramatically right across the country. Our letter carriers are now more and more becoming mobilized. They drive vans instead of carrying around a satchel of mail. It’s part of our transformation initiative that we’ve put in place in the last few years,” Hamilton said. “The future of our delivery is more employees in vans, parking and delivering mail and heading to the next neighbourhood. That started a year ago in Winnipeg and we’ve rolled it out into Toronto and Calgary and other locations and it’s been successful. It better equips us to deliver parcels as well as some mail and at the same time reduces our overall costs.”

SuperMailboxes in a Markham, Ont. community.

” I hope the union leaders don’t kill the golden goose, which is Canada Post. We need to be reasonable in these times and unfortunately, I don’t think the union has been as helpful as it could be in helping us solve the challenges facing Canada Post.”

Fletcher said all kinds of cuts, such as SuperMailboxes in favour of home delivery, have been examined but collective and service agreements make change difficult.

“All those things are looked at and are implemented in places. But there are collective agreements and certain expectations and it becomes very complicated very quickly. That’s another reason why privatization may be something that certainly will not happen in the short or medium term,” Fletcher said.

As Canada Post struggles to adapt, no one is indicating that it’s time for Canada Post to hang up its satchel for good. As many industries try to find their way in the digital world, there is agreement on the need for change in order to stay profitable.

“I don’t want to paint a doomsday scenario but I think anyone who’s affiliated with the post office and Canada Post should take a good long read of the annual report and see that our mail volumes have declined … and realize that the time is now for us to make major changes. Some of them may not be easy. There is a future out there for us but the time is now for us to seize it, not to wait until things get so dire that we can’t meet our obligations,” Hamilton said. “We can make changes now that ensure Canada Post is here to serve Canadians digitally and physically for many, many years. If we don’t make changes and have a real grown up conversation about the future of this company and the service that we provide, then we are going to struggle beyond how we’re struggling today.”

Fletcher said he’s hopeful Canada Post will return to profitability next year.

“I’m very optimistic, however the transformation of Canada Post must proceed and I hope the union leaders don’t kill the golden goose, which is Canada Post. We need to be reasonable in these times and unfortunately, I don’t think the union has been as helpful as it could be in helping us solve the challenges facing Canada Post.”